Processing Fight Gets Nasty: Visa Sues First Data

V isa U.S.A. has sued First Data Corp. to stop the development of a transaction-processing system that bypasses Visa's own VisaNet system. The suit was filed in U.S. District Court for Northern California on April 15, 2002.

The suit charges First Data with a variety of allegations, including trademark infringement and breach of contract. Visa says that First Data's Intra-FDC Processing and Settlement service threatens to dilute the Visa brand as well as the integrity of the nation's credit card business.

Also in dispute is whether Intra-FDC is the pilot for a new private arrangement, as Visa charges it is, or the expansion of a system for processing transactions First Data has been using for 30 years, as it claims.

This puts the country's largest credit card brand in opposition with the country's largest credit card transaction processor.

Visa says First Data, which processes transactions for both merchants and card issuers, must abide by rules that require all transactions be processed through VisaNet for authorization and settlement between the merchant and issuing bank. While Visa rules allow so-called private arrangements contingent upon pre-approval, the company views them as problematic to its system and brand.

In a statement to The Green Sheet, Nancy Etheredge, First Data Director of Corporate Communications, said, "First Data has been working intensively for the past two years on enhancements to our settlement products. Intra-Processing and Settlement creates a single connection - from point-of-origin to point-of-settlement - providing direct routing, funding, authorization and settlement of payment transactions. These enhancements streamline transaction flow, improve posting and funding time frames, eliminate redundant processes and end points, and reduce costs.

"While we are unable to comment on pending litigation, we can say that Visa has been aware of our enhancements and related activities over the last several months. The enhancements do not change the way we have conducted Intra-Processing and Settlement for more than 30 years; they are simply enhancements to the existing process.

"Intra-Processing streamlines the settlement process, and the expansion of it is a positive move for card issuers, merchants and the payments industry."

Visa alleges that First Data is attempting to bypass its systems in authorizing, clearing and settling transactions and says Intra-FDC processing could create a closed-loop system and become an alternative to the two major card associations. If Visa is eliminated as the middleman in the process, banks no longer would need to pay dues to Visa or MasterCard.

A prepared statement from Kelly Presta, Visa U.S.A. Vice President, explains the company's stance on filing the suit:

"We have taken action to ensure that consumers, issuing financial institutions and merchants will continue to receive reliable, secure and convenient transactions at the point-of-sale. Visa is unwilling to risk compromising the Visa payment service by allowing First Data to sidestep the rules that they had contractually agreed to honor and which make the system work. "We have taken this action because First Data had proposed to conduct a 'private arrangement' by which it would clear transactions between member financial institutions outside of the Visa payment system. Visa attempted to work with First Data to ensure that this arrangement complied with the system rules. Unfortunately, First Data unilaterally commenced the private arrangement, and, as a result, we had no option but to seek court action to require First Data to comply with the rules to which they agreed. "In the U.S., over 99 percent of all Visa transactions go through the Visa payment system. By 'seeing' essentially all transactions, Visa can manage risk by identifying and addressing irregularities in near real time. Other critical software applications and services integral to the Visa payment system and promise of the Visa brand depend on Visa 'seeing' the transaction on a real-time or near real-time basis. "Because private arrangements involve transactions conducted outside of the Visa payment system, Visa's rules for 'private arrangements' are intended to ensure that the transactions involved do not compromise the system as a whole. The integrity and reliability of the Visa payment system is critical to its stakeholders: consumers, member financial institutions and merchants. As a result, Visa is asking that the court require First Data to comply with Visa rules, including obtaining Visa's permission prior to commencing a private arrangement."

In a letter to First Data customers regarding the allegations, Eula Adams, First Data Senior Executive Vice President, wrote, "The expansion involves the addition of one First Data platform to existing Intra-FDC processing. We want to stress that Intra-FDC processing is not something new. We've been conducting it on behalf of First Data clients, with Visa's acceptance, for 30 years."

He added, "We don't understand why Visa would now attempt to limit Intra-FDC processing after 30 years and characterize it as a 'Private Arrangement' subject to their approval."